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CBN ECONOMI C&FINANCIAL REVI EW, VOL. 39 NO. 1 1-19THE PERFORMANCEOFTHE NIGERIAN CAPITAL MARKET SINCE

DEREGULATION IN 1986

BY

J .A.BABALOLA AND M.A.ADEGBITE

ABSTRACT

The capital market in Nigeria had been influenced by various factors whichare associated with the level ofdevelopmentof the Nigerian economy The paperdiscusses the developmentofthe capital market with emphasis on the period sincederegulation in1986. The institutions that are crucial for the deliveryofjnancialservices in the market wereanalysedwithfocuson their evolution,performance andprospects. The.market in Nigeria was compared with other emerging markets withthe conclusion that the market, remains shallow and without the expected varietythat characterised markets in countries at similar level ofdevelopment. Theprospectsofthe market appear to be bright considering the current postureofthegovernment in the areasofprivatization and commercialisationofgovernmententerprises. Also, with appropriate regulatory framework that would guide theoperators moreefectively,the market could assume the expected role ofprovidinglong-term financingfor the developmentof the economy.

I

1. INTRODUCTION

The role of capital in the production process and economic performance of a

nation has long been recognised. Capital provides the impetus for the effectiveand

eficient combinationoffactorsofproduction to ensure sustainable economicgrowth. Moreover, the effective utilization of productive resources accumulatedover time would determine the pace of growth ofaneconomy. Growth in productive

activities and its distribution determines the social well beingofthepopulation. Capitalformation, however, can only be achieved through conscious efforts at savings

J .ABabalolaandMA. Adegbite are Assistant DirectorsofResearch,Central BankofNigeria

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2 CBN ECONOMIC&FINANCIALREVIEW, VOL.39 NO.1mobilization and accumulationofresources by both the publicandprivatesectorsofan economy. The unique position ofthe capital market could, therefore, beappreciatedfiomthis perspective. Financial markets generally provideavenue forsavings of various tenors that are made available for utilization by various economic

agents. The capital market, which is a major segment of financial markets, provides

a setting through which medium to long-term resources are provided for productive

utilization.

The objective of thepaperis to appraise the Nigerian Capital Market since1986 when the liberalisation policy was introduced. The introduction of the

StructuralAdjustment Programme( SAP)in1986put pressure on the Nigerian capitalmarket. This was in response to the high interest rates in the money market, which

led enterprisesinthe private sector to partronise the capital market for equity capital.

As a result, greateroppo&nitiesfor private investors who wanted to borrow fromthe capital market were created.

The response of the Nigerian capital market to these developments is therefore the

thrust of this paper.Accordingly, the rest of the paper is structured into five parts. The

theoretical and conceptual issues are treated in part2,performance appraisal of the

market using some of the market indicators is done in part 3, and problems and

prospects are discussed in part4.The last part contains the summary, conclusion

and recommendations

2.0 THEORETICAL AND CONCEPTUAL ISSUES: THE ROLE OF

THE CAPITAL MARKET IN ECONOMIC DEVELOPMENT

Financing the savings- investment gap, especially, in the less developed economieswhere savings mobilization could not keep pace with the level of investment, has

necessitated the need to encourage foreign capital inflows in order to bridge the gap

and thuspromote economicgrowth.Thisisin line with the general belief that in theII

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Babalola/Adegbite 3absence of domwtic saving which is the source of needed capital, theencouragementof foreign capital inflows is more likely to have a positive influence

onthedevelopment process. Thi s involves the convertion of domestic and foreign

resourcesinto tangible and intangible productive assets that would improve the overalloutput of the economy. These resources would also need to be structured into

acceptable tenors ( Short, Medium and Long) so as to promote development.

Therefore, the cardinal roles expected of the money and capital markets are to

provide such investible funds. The capital market in particular contributes to

economic development through the provisionofthe required resoitrces which arewithin the medium to the long term spectrum. The capital makket also providesveritable avenue for private enterprises to raise investibleh d s forexpansionandother long-term purposes.

Portfolio theory considers the efficiency of the capital market based on its

ability to respond to market information. A market could either be strong,

semi -strong or weak in form. The efficient market hypothesis describes an efficientmarket as one where security prices fully and speedily reflect available information.

Strong market, reflects totally the information on the performance of the listed

company which then impacts on the pricing of such companys shares while semi

strong and weak markets have some degree of imperfections in the ability of the price

to respond to the information on such shares. The relevance of the efficient market

hypothesis with respect to quoted companies is that the hypothesis holds true when

the companys real financial position is reflected in its share price.

Many development economists consider investment as the most important

factor in the growth process. Rostow(1961)in hiswdrk defined the takeoffofaneconomy into a sustained1evel.interms of a critical ratio of investment to nationaloutput. Arthur Lewis (1955) described the process of development as one of

transforming a country from being a low saver and investor to a high saver and

investor. It is conventional for economic planners to calculate fairly accurate ratios

of investment to national income that will be required either to achieve a particular

rate of growth or to prevent capital per head or income per head fiom falling.

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4 CBN ECONOMIC&FINANCIAL REVI EW, VOL. 39NO.1The computation involves assumptions about the normal relationship between capital

and output, a relationship usually expressed in the concept of capital output ratio.

H. G.Johnson (1969) considers capital accumulation in its widest sense as thedistinguishing characteristic of development and the structural transforhation ofeconomies as a process of capital accumulation.

The conditions for development consist, in the main, sustainable capital

accumulation over time and creation of social and economic environment that

guarantees effective utilization of capital resources. Also of relevance for policy

analysis is the incremental capital output ratio (ICOR), which is critical for

estimating the level of investment that would sustain, given level of output?Theuseof ICOR for estimating investment outlay for a given level ofoutputwasinspired byHarrod(1939)andDomar (1947). Although, their work was originally designed toestablish the condition for equilibrium growth, their equations have been manipulated

for various alternative uses.

TheHarrod-Domar equation predicts an inverse relationship betweengrowthand ICOR, but since ICOR is assumed constant in the long run, it is ICOR that

influences growth and not the other way round. Reddway (1962)had a divergentview on the relevance of ICOR in predicting growth. He suggested that before

calculating the additional capital requirement for a target growthrate, it would be

prudent for a developing economy to assessthe4evelof output that might be expectedfrom increased utilization of existing factors and better methods applied to existing

stock of capital.

The roles of financial institutions are critical in economic developmentas

they engage in facilitating reliablepaymentssystem, mobilising savings, allocatingcreditand diversiQingrisks(Haleyand Schel,1973). Capital market institutions inparticular are in position to encourage investment, as investors are able to borrow

funds and invest more than they would have done without such institutions. The

institutions arethusable to pool savings and direct them into viable investment outlets

(Copeland andWeston, 1980).

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.Babalola/Adegbite 5The issue of creating a reliable capital market for development revolves around

the emergence of enabling environment which allows competition to flourish. As

Lowyeta1 (1996) noted, creation of an acceptable climate for investment is criticalfor development. Suchclihate has certain prerequisites which include a freelyconvertible currency; effective legal and institutional framework, reliable accounting

standards and a systemofregulation that protects consumers but doesnototherwise

inhibit competition.

The reforms in the Nigerian capital market attempt to address some of the

issues enumerated byLowyeta1(1996). The recent report on the market recognisedthe need for an enabling environment while competition is being addressed through

the establishment of additional stock exchanges and capital trading points.

3.0PERFORMANCEOFTHE NIGERIAN CAPITAL MARKET SINCE 1986:

An evaluation of the performance of the Nigerian Capital Market from

1986- 1999 is done in this section, using some of the generally accepted criteria,which include:

(i) Number of listed companies;

(ii) Number of listed securities;

(iii) Size of the market or market capitalization; and

(iv) All-share price index, which is a measure of the performanceofthe

market.

The analysis of the major indicators of activity in the capital market showed

that the market has experienced remarkable progress since 1986. Transactions in

equities in the market based on its current level of development could be considered

to be weakly formed as.the level of information dissemination and processing toinfluence market behaviour remained weak. However, with the computerization of

trading and increased transparency in delivery of corporate information, the market

has become more efficient. Transactions in the market recorded increwes in the

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6 CBN ECONOMICk FINANCIAL REVIEW, VOL.39NO.1number of listed securities, companies, market capitalization and price index during

the period under review. The improved performance of all four key indicatorswas

traceable largely to the establishment of the second-tier securities market(SSM) in1985 and the deregulation of interest rates in1987,coupled with the privatizationof

some government owned companies in1991. Eighteen(18)government parastatals

(16 Federal and2state government-owned), contributed to the increased tempointhe

number of companies and new securities issued and listed in the market.

Furthermore, the deregulation of interest rates made many private enterprises/

investors to patronise equity market to source funds as bank lending became

relatively more expensive. The number of companies listed on the exchange

(equities) grew by 95.0 per cent from 100 at the beginning of 1988 to 195 at

end-December, 1999.The number of total securities listed and traded also increased

from244 in1987to a peak of276 in1996before declining to268 in1999. Some of

the major securities traded on the market during the period were government

development stocks, corporatebondddebenturesand equities. As at end-December1999, securities listed and traded on the market were made up of 15 government

bonds, 58corporatebonds/debenturesand195equities.Thegrowthof listed companies coupled with greater awareness on the partof

investors resulted in increase in the number of securities issued and traded in the

market. This also contributed to the increase in market capitalisation, which grew

from8.3 billion or7.6percent of GDP in1987to294.1billion or8.7percent of GDP

at the endof1999.

The number of listed companies on the Nigerian Stock Exchange is

comparable with those of many emerging markets. Though capital listing was higher

than in most stock markets in Africa, it fell below some other emerging marketsof

Asia and Latin America. For example, out of the17stock markets in Africa, Nigeria

had the third largest number of equity listingsof183 in 1998, surpassed only by

Egypt(650) and South Africa(642). Nigeriaalsohad a higher number than Poland

(143),Jordan(139), Argentina(136)and Venezuela(91). It,however, recorded fewer

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Babalola/Adegbite 7

listings compared to India(5843), Brazil (536); Malaysia (780); Indonesia (282) andTurkey (257). Further insight into the performance of the market showed that

share-price indices rose during the period under review. The observed upward trendofshare prices in the stock market was an indication of relative prosperity in the

economy. The all-share price index grew by 22 per cent in1988,38per cent in 1990,33.9 per cent in 1995 but dropped in 1998 and 1999.

Activities in the new issues market improved during the review period. The

entry ofsome corporate entities into the Nigerian capital market after the

deregulationofthe market contributed to the upsurge witnessed in the market.

Between 1988 and 1998, new issues grew remarkably fiom 400 millionto 15,018.1

million in 1998, but fell to 12,038.5 million in 1999. On the aggregate, 355 new

issues of 28,527.9 million shares valued at 56994.0 million were offered for

subscription between 1990 and 1999.

Trafisactions in the secondary market also showed remarkable growth. Atotal of 1,528.4 million shares valued at 37,488.8 million in 5,855.7 deals were traded

between 1988 and 1998. Transactionscsnthe Nigerian Stock Exchange (NSE)grewfiom 21.5 million shares valued at 249.5 million in 1988 to 33.4 million shares worth

553.2 million at the endof1990. By 1995, the total volume of shares traded on the

mdrket had risen to 396.91 million shares valued at 838.8 million. Between 1996and 1997, the average volumeofshares traded was 1,062.7 million, valued at 8,564.1

million. Between 1998 and 1999 securities traded averaged 3,025.7 million shares,

valued at 13,826.6 million, while transactions in equities dominated the market

during the periodofanalysis.

4.0 PROBLEMSOFTHE NIGERIAN CAPITAL MARKER

The Nigerian capital market, like the national economy, has been faced with

many problems. These problems are both endogenous and exogenous. The

exogenous problems are those outside the direct control of the market but whichare

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8 CBN ECONOMIC&FINANCIALREVIEW, VOL.39 NO. 1regulation-induced. The endogenous problems are those that are internal to the market

but which are amenable to changes with improved operational procedures including

the adoption of information technology. Someofthese problems are discussed be-low:

(i) Small Sizeofthe Market:

Among the major problems facing the Nigerian capital market is the sizeof

the market. At about200quoted companies and a market capitalization of 294.1

billion at the end-December, 1999 the size of the market can be considered to be

small when compared with stock market in other emerging markets. For example,the South African stock market has about650listed companies while South Korea

has about 700 listed companies. The small size of the Nigerian Stock market has

been traced to apathy of Nigerian entrepreneurs togopublic due to the fear of losing

control of their businesses. Another factor is the weak private sector which is a

serious constraint militating against healthygrowthof the stock market.

(ii) ProblemofIlliquidityofthe Market:The liquidity of a stock market relates to the degreeofaccess, which

investors have in buying, and selling of stocks in such a market. The more liquid a

stock market is, the more investors will be interested in trading in the market. The

lack ofadequate number of irivestors in theNigerimstock market is a reflection ofproblem of illiquidity in the market. At an average ratio of2per cent per year, the

turn-over ratio, a measure'ofthe valueofshares traded relative to local market

capitalization is very low in Nigeria, compared with10.0per cent, 9.0 per cent and

4.6 per cent in Botswana, Zimbabwe and Mauritius, respectively. The low trading

activities .are alsoaresult of theawnershipstructure. Until 1995, when the NigerianInvestment Promotion Commission Decret 16 and the. Foreign Exchange(MonitoringandMiscellaneous) provisions Decree17were promulgated to replacethe NigerianEntevrises Promotion Decree of1984and Exchange Control Actof1962, the Nigerian stock market was restricted largely to local investors apart from

- -

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Babalola/Adegbite 9

the original investors in foreign companies who were already in the market before the

indigenisation Decree of 1972.

New foreign capital had little or no access to the market. The goodperformance of Botswana, Zimbabwe and Mauritius has been traced to the open door

investment policy of these countries. In addition, the buy and hold attitude of

Nigerian investors contributed to the problem of illiquidity. The holdings of original

investors and the public sector are normally not tradedexcept for terminal

divestment. Thisoftenleaves only the proportion of shares held by few individualsand institutional investors for trading on the market, thus, limiting the liquidity of

the market.

(iii) SlowgrowthofSecurities Market:

Lackofcooperation between the-Securities and Exchange Commission (SEC)

and the Nigerian Stock Exchange (NSE) has been responsible for slow growth of the

securities market. Forexample, one of the major criticisms of SEC was that it did

not allow the issuing houses and stockbrokers to undertake the pricing of equities.With the transfer in 1993ofpricing and allotment of initial public offer to market

operators, positive movement was observed in share prices. The issue of costof

raisingfundsin the market is also important. The cost of transaction could be said to

be a measureofefficiency in the market. Transaction cost in the Nigerian capital

market is enormous. The costs which an average investor would have to meet in the

course of raising funds include; brokerage fees; stamp duties, and other charges that

may be imposed by the SEC, apart from other fees payable to stockbrokers.Therefore, the cost of going public, raising additional equity or obtaining loan

facility fiom the capital market is high. It has been estimated that the cost of raising

US$1 million equity capital in Nigeria is about4per cent of the value, whereas, the

costofraising the same amount in Kenya, Zimbabwe and Ghana is2.35and2.3per

cent, respectively.

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10 CBN ECONOMIC8c FINANCIAL REVIEW, VOL. 39 NO. 1.(iv) Delay in Delivery ofShare Certificates:Prior to April, 1997 when the Central Securities Clearing System (CSCS) started

operation, the delay in delivery ofshare certificates to investors and intra-firm

settlements used was a problem in the market. Manyofthe unclaimed certificates

and dividend warrants that are being published regularly areasa resultofthe delay in

deliveryofcertificates. With the introductionofCSCS, shareholders are now able to

take advantage of capital appreciation while transaction period-has been reduced to

T+5.The objectiveofthe CSCS system is to achieve real-time transaction reporting,through automated order routing and executing system, which allows post-trade com-

parison and analysis, and ensures audit trail ofall the market transactions.

(v) ProblemofManual Call-over

The manual call-over whereby all stockbrokers have to be physically present

on the floor of the Exchange for trading in securities had also contributed to the slow

growth of the market. With the recent introductionofAutomated Trading System(ATS), it is expected that stockbrokerswill be able to do business moreefficientlyand thus contribute to the growth of the market.

(vi) DoubleTaxation

The Nigerian stock market is faced with the problemofdouble taxation. In

a capital market, the operating tax policies have implications for the supply and

demand for financial assets. Depending on its nature and structure, taxation could

either enhance or retard capital market growth. Tax can be a source of hindrance to

development when it is high or levied at multiple stages. Currently in Nigeria, there

is income tax, capital gain tax, withholding tax and company income tax. All these

taxes together have the tendencyofretarding investment because of their burden on

investors. Most often, countries that have experienced growth in their stock market

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Babalola/Adegbite 11

have come to realise the role which taxation plays in the promotionofinvestment in

the stock market. For instance, countries like Botswana, Ghana, Kenya, Mauritius,

Namibia and Swaziland have recognised the important role which taxation can playin the developmentofthe market. Taxation of equities at both the corporatetaxand

dividend withholding levels is an importantarFa that needs to be examined. Thepractice in theU.K.may offer a useful example for Nigeria. In the UK, through the

Advance CorporateTax (ACT) System, individuals are given tax relief at the

corporate level for distributed earnings. The ACT was introduced in Britain to cor-

rect the distortions which double taxation had on corporate investment. A number of

developing countries like Columbia, Jamaica, Indonesia andMexico,haveone formof tax integration or the other.

Presently, Nigeria has not taken any step to reduce the burden of double

taxationas incentive for investment in the capital market. Apart from its useas a

means of generating revenue, some countries have used tax policies as incentives for

developin8capital market. They have been used not only for the supply and demandfor securities, but alsoas penalties for companies that were reluctant to go public.

For example, Brazil used dividend tax exemptionor reductions, stock acquisitiontax incentives and provision of tax fund sharesas incentives for developing the capital

market.

(vii) Lack ofEffective Underwriting

Lack of effective under-writing is one of the problems confronting the

Nigerian capital market. Underwriting could be in the form of firm contract, or

stand-by arrangement and when an issue is large, there would be need for an

underwriting syndicate. Anobserved deficiency of the Nigerian securities market is

the non-existenceofeff'ectiveunderwriting. Though the issuing houses claim toundertake underwritingas part of their functions, anda consortiumofunderwritersoften exist when shares are being offered, underwriting business has hardly taken

place in the real sense of it. Underwriting entails effective placing of entire issues,

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12 CBN ECONOMIC&FINANCIAL REVIEW, VOL.39 NO.1and establishing or maintaining a stable trading market for the under-written

securities for which there would always be a lead ormahagingunderwriter. Only afew of the existing issuing houses can undertake such functions that guarantee theunderwriting of the shares not absorbed by the investors up to a certain percentage.

The .underwriters are in fact the market makers who purchase the securities

concerned on their own account to maintain a price when the market price of the

offered security falls under the issue price. When such problem arises, the lead or

managing underwriter would be expected to buy all such securities and distribute

them to the other members of the underwriting syndicate or consortium according to

predetermined ratio.

(viii) ProblemofM acroEconomic InstabilityLastly, the problem of macroeconomic instability in the country has

continued to be a hindrance in the development of the Nigerian capital market.

Macroeconomic policies that would ensure long-term stability are essential in

attracting a sustainable long term investments. Such policies should be conduciveto both savings and investment to ensure confidence in the economy. Policies must

ensure an attractive long-term yields for equities in comparison with other domestic

and foreign investment alternatives. Frequent fluctuations in exchange rates and

negative real rates of return on investments often force investors to move to other

investment outlets or out of the economy entirely.

4.0 PROSPECTS FOR IMPROVED PERFORMANCE OF THEMARKET

Developments in the Nigerian capital market represent positive indication

of the prospects and promise the market has for the future. Resolving the

outstanding problems of the market isa major task that must be accomplished for

the future developmentofthe market.Tothis effect, a number of reformmeaweshave already been undertaken to refocus the marketsoas to meethturechallenges.

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Babalola/MA.Adegbite 13

For instance, in pursuance of its deregulation policy which began with the

introduction of SAP in 1986, several efforts have been made by the government to

ensure that the Nigerian capital market operates like its counterparts in other

economies. The deregulation of interest rates has had positive effect on the number

of private enterprises sourcingfbds from the market and it has also affected thevolume and market capitalization. In1991, the government deregulated the pricing

of securities in the market by disengaging the SEC from securities pricing. In effect,

the pricing of new stocks on the market was left in the hands of stock brokers and

issuing houses. Further steps have also been taken to improve the settlement process

and brokerage services, Before the introduction of the Central Securities Clearing

System (CSCS) in April, 1997, the process of transacting shares used to be

unnecessarily long and worrisome to investors. With the CSCS, which is a

computerised depository, clearing and settlement system that acts as the clearing

house for all shares traded on the Exchange the NSE has evolved a gradual

dematerisation of share certificates, thus de-emphasising the use of share certificate

as evidence of share ownership. An assessment of the CSCS indicates that the

settlement and delivery systems of transactions in the market have been reduced

from3-6months to6days.

In order to encourage continuous stock trading throughout working hours

and allow dynamic pricing system, the Nigerian Stock Exchange replaced the old

manual call-over methodoftrading with the Automated Trading System (ATS). The

ATS isacomputerised electronic system in which dealers from their work stations

are linked to a central server at data control room of the NSE. It is expected that the

electronic based trading system would enhance the efficiency of trading,transparency in the market, realistic pricing of securities and generate new trading

opportunities for dealing members. Apart fiomthat, it will also establish a tradinglink with all regional markets in Africa and other parts of the world. The ATS

project was designed to bring the Nigerian securities market at par with

international standards and enhance settlement and delivery of transactions in the

market.

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14 CBN ECONOMIC &FINANCIAL REVI EW, VOL. 39 NO. I

The removal of legal restrictions on foreign investors isalso a positive

development. The promulgation ofthe Nigerian Investment Promotion

CommissionOIJIPC)DecreeNo. 16 and the Foreign Exchange (Monitoring andMiscellaneous) provisions Decree No. 17of1995 were made to replace the

Nigerian Enterprises Promotion Decree of 1989 and the Exchange Control Act, of

1962. The enabling environment created by these legislations opened up the economy

to foreign investors and also removed barriers restricting foreign investors access to

the capital market. The new Decree repealed the previous indigenisation Act which:

limited foreign participation in the capital market,

allowed unrestricted foreign interest in Nigerianquoted.companies,allowed free repatriation ofcapital, dividends, capital gains, and other

interests from investments in securities,

allowed unhindered transactions in the foreign exchange market and provided

for foreign investors to buy sharesofNigerian companies in any convertible

currency.

Other efforts made at repositioning the Nigerian capital market was the

constitution of the Dennis Odife panel in 1996 to review the structure and evaluatethe performance of the capital market. The Panels recommendations resulted in the

promulgation of the all-embracing Investment Services Decree of 1999 to amend,

modify and codify the provisionsofthe principal laws and regulations within the

capital marketaswell as the re-establishment of SEC as the apex regulatory agency

in the market. The panel recommended the establishment of the Abuja Stock

Exchange, which has commenced operation, in addition to twelve capital trading

points in other partsofthe country. It is expected that the new Exchange will enhancecompetitionandmake the market fully functional and effective. The recent decision

to repeal and refocus the Trustee Investment Act of1962, the Insurance Decree of

1991 and the adoption of the strategy of sourcing funds for financing capital projects

from the market by the3tiers of government would go a long way in enhancing the

deepening of the market.

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BabalolaA4A:Adegbite 15

5.0 SUMMARY AND RECOMMENDATIONS.

5.1 Summary

Thepaper examined the performance of the Nigerian capital market since

1986. It was observed that prior to 1986,activities in the market were very low due

largely to availabilityofother financial instruments for irivestmentat a relativelycheaperrate. Befbre1987, the interest rates were low and access to cheapfundsin ,themaney market was easy. Also,tbe level ofactiviq in the marketdepended.ongovemment'policy,such as government'borrowingthough Developmpnt Stkksandindigenisation policy of1972and1977. . .

From1986, however, the marketrespondecpositivelytothe liberalizationpoliciesofthe government.Themarket witnessed increased modernization of its .,

facilities while the operators became more active in the market. In addition, the

deregulationofinterest-rates in 1987 stimulated keen competition in the financial

system, thereby, resulting in many enterprises in the private sector approaching the

capital market for funds. From1988 onwards, the market witnessed remarkable

p o d in the number of listed securities, resulting its intense market competition.In spite of the improved performance in the market, the Nigerian capital

market continued tobe faced with many problems, Some of these problems are

endogenous while others are exogenous. Among the major problems facing the

Stock Exchange is the small size of the market, with only about 200quoted

companies andamarket capitalization of256.9 billion in 1998. The size of the

market is considered very small when compared with stock markets in other

emergkg markets. Other problems highlighted in the paper included illiquidity,lack of cooperation betweenSEC and NSE, the high cost of raisingh d s on themarket, double taxation, delay in the transfer and delivery of share certificatesto

investors, lack of effective underwriters and problem of macroeconomic instability.

With the recent efforts of the government at deregulating the economy and

reforming the market, the prospects of improved activities in the market are very

bright. The pricing of new stocks has been transferred to the issuing houses while a

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16 CBN ECONOMIC&FINANCIALREVIEW, VOL.39 NO.1new stock exchange, the Abuja Stock Exchange is in place and12trading points are

tobeestablished in Abuja and otherpartsof the country. A Central Securities Clear-

ing System (CSCS)hasbeen introduced to reduce the timeittakes to transact anddeliver shares to investors while an Automated TradingSystem(ATS)hasbeen intro-duced to enhance efficiency and transparency in the market.

The problemofmacroeconomic instability.isbeing addressed through

appropriate policy measures and the strengtheningofthe institutional regulatory

framework.The removal oflegal restrictions on foreign investors to the extentwhich they can invest in the market represents.apositive development. Also thepromulgationofan all

-embracing Investment Services Decree in 1999to amend,

modify andcodifl the provisionsofthe principal laws and regulations within thecapital marketas well as the re-establishmentofSECas the apex regulatory agency

in the market are in the right direction. These in addition to theliberalization andinternationalizationofthe market would go a long way inrepositioningthe market,5.2 Recommendations

(i) Review ofcostofborrowingfromthe market.

There is need to encourage more enterprises to come into the marketsoas to

expand and deepen the market. This can be achieved through the reviewofcosts ofborrowing from the market. The high costs of raising funds on the market has been

recognisedas oneofthesfactorsmilitating against thegrowthofthe Nigerian CapitalMarket.(ii) Appropriate Savings/ investment inducing measures

There is need to pursue economic and financial policy reforms that encourage

investment in the capital market. In this respect, monetary policies should be

designed in such a way that savings are encouraged for investment.

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BabaloldM.A. Adgbite 17(iii) Tax incentives and listing requirements

Furthermore, small scale enterprises needtobeencouragedthrough varioustax incentives and listing requirements to come to the market. Such policyhasbeen

used in Brazil and some south east Asian countries. Though government has

repealed all laws restricting r ee flowof foreign investment into the country, there isfurther need to ensure that all infrastructure in the country are revampedso as to

provide the necessary basic support for the new enterprises.

(iv) Enlightenmentonneed to patronise the capital market.

The problem ofilliquidity needs to be addressed through public

enlightenment of the general public on the need to patronise the capital market and

also to discourage Nigerian investors from the buy and hold attitude.

(v) Increased internationalisationofthe capital market

Given thelowdepth of the market, there is need for some vigorous policies

to internationalisethe capital market to allow for the listing of foreign currencydenominated securities on the stock exchanges in Nigeria.

(vi) Formationofunder-writing syndicate.

Lack ofeffective under-writing has remained one of the problemsofthe

Nigerian stock market. There is need tore-examinethis problem and form an underwriting syndicate.

(vii) Cooperation betweenSECand thestockexchanges

The issueofcooperation and understanding betweenSECand the exchanges should

also be looked into.

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18 CBN ECONOMIC &FINANCIAL REVIEW, VOL. 39 NO. 1

R E F E R E N C E S

Adeyemi, K. S. (1998): Options for Effective Development at theNigerian Capital Market: a paper presentedat a Seminar organised by NES at

NIIA, Lagos on21stJanuary, 1998.Aigbokan, B. E. (1996): Financial Sector liberalization and Capital

Market Developments in Nigeria in S.Mensah Ed. (Rector Press Limited,Massachusetts), pps 196- 209.Akamiokhor, G. (1996): The role of Securities Commission in Emerging

Capital Markets inS. Mensah Ed. (Rector Press Limited, Massachusetts)

pp. 59- 68.Alile, H. i. (1996): The role ofthe Capital Market in Africas Economic

Deve1opmentinS. Mensah (Ed.) (Rector Press Limited, Massachusetts), Pages180- 195.

Anyanwu, J. C., (1996): Towards Capital Market Integration in Africa in

S. Mensah Ed. (Rector Press Limited, Massachusetts) pp. 210- 229.

Alile,H. i. (1992):Establishing A Stock Market-Nigerian Experience a paperpresented at International Conference on promoting Capital Market in Africa atNICON Hotel, Abuja.

CBN (1999): Reform of the Nigerian Capital Market- anunpublishe paper ofFinancial InstitutionsOfice, Research Department, CBN, Abuja.

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Babahla / MA. akgbite 19

CBN (1999): Briefs on Lagos Stock Exchanges Central Securities Clearing System

(CSCS) and Automated Trading System (ATS) - An unpublished paper ofFIO,Research Department, CBN, Abuja.

Emenuga, C. (1998): The Nigerian Capital Market and Nigerias EconomicPerformance: Paper presented at a Seminar organised on 21st January 1998 by

Nigerian Economic Society( NES)at NIIA, Lagos.Falegan, S.B. (Chief): (1991)Nigerias Capital Market: Development, Problemsand Prospects- a paper presented at a Seminar on Stimulating theNigerian Capital Market for the challenges of 1990sorganised by SEC at Gateway

Hotel, Abeokuta.

Kineh,D. E. (1998):The Nigerian Capital Market:

Present State and Challenges in the millennium-a paper presented at a workshopon

public offer of securities disclosure and otherSECRequirements at the Gateway Hotel,

Ota, OgunState.

Ogwumike,F.0.andOmole, D. A. (1996):The Stock Exchange and DomesticResources Mobilization in Nigeria in S. Mensah Ed. (Rector Press Limited,

Massachusetts),pp.230 - 251.Ojo, M.0. (1993):Deregulation of Government Securities: Implication for

Nigerian Capital Market-being a paper presented atMIDAS Capital Market forumorganised by Guardian andMidasMerchantBank on 24th September, 1993.

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CBN ECONOMIC8FINANCIAL REVIEW, VOL.39NO. 1 20-39DETERMINANTSOF FOREIGN DIRECT INVESTMENT (FDI) IN

NIGERI A: AN EMPIRICAL INVESTIGATIONBY

H.A. SalakoandB. S.Adebusuyi

This paper examines, empirically, the determinants of foreign directinvestment in Nigeria. The results indicate that exchange rate, governmentcapital investmentifi nfiastructureand credit to the domestic economy are someof the mainfactors that influenceFDIflow to Nigeria. In particular; it shows thatthe ratio of external debt to GDP (Debt/GDP)was an important determinantoftheflow offoreign investment. FDI was also observed to be sensitive to domesticinterest rate and real per capita income. The study also highlights the need. tomaintain political stability in order to attractFDI.

1. INTRODUCTION

The need to accelerate the paceofeconomic growth and development by

many countries, especially the Less Developed Countries (LDCs), have propelled

them to make deliberate efforts to attract Foreign Direct Investments(FDI). T h i s isbecause most LDC' s economies (including Nigeria) arecharacterized by inadequate domestic savings, excessive imports relative to exports as well as high

level ofexternal debts. They therefore require external capital to finance their

current account deficits and to accelerate the paceofeconomic growth and

development through increased production activities. Inthis regard,FDI augments

domestic savings in bridging the savings investment gap.

;HA. Salako and B.S. Adebusuyi are Assistant Directors and Principal Economist,respective&,in the Research Departmentof the Central Bankof Nigeria.

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SaI akdAdehwyi 21The efforts made by LDC' s are geared toward improving the general

investment climate through the adoption and implementation of foreign

investment-friendly policies and programmes such as tax incentives, export

promotion and macroeconomic adjustments. Significantly, the drive for foreign

investment derivesfiomthe various benefits it confers on the host country. Thesebenefitsinclude addition of new capital, technology, improved management andmarket

access. FDI has also been acknowledgedasa potent sourceofimprovingeficiencyof the productive sectorsthroub' competition, stimulation of economic progress,creation of jobs and fosteringgrowth in the host economies. However, in spiteof

the genuine desire and efforts by the LDCs to attract the much needed foreign

investment, a number of factors render them unattractive. Some of the factors

include heavy debt burden which has eroded confidence in developing countriesas

well as low credit worthiness. Othersarerecession and,persistent macroeconomic

and political instabilitywhibh have further worsened the perception of foreigninvestors.

A proper understanding of the determinants of FDI inflow therefore,wouldguide policy choices and facilitate the institution and implementationofappropriate

measures to attract the inflow of the desiredquantumof investment. This paper isanattempt in this regard, as it aims to bring to the fore variables that influence the flow

of FDI to Nigeria. The rest of the paper is divided into six sections. SectionI1reviews theframeworkand trend of foreign investment inflow into Nigeria. Thetheoretical framework and reviewofliterature on FDI flows is undertaken in section

111while sectionIVcontainsaneconometric model of determinantsofFDI flows to

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22 CBN ECONOMIC&FINANCIAL REVIEW, VOL.39 NO. 1Nigeria. Section V presents the resultsofthe empirical analysisofthe model, while

section VI concludes the paper with some policy recommendations.

SECTION I1APPRAISAL OF POLICIES AND INCENTIVES FOR INFLOW OF FDI

In recognitionofits importance and role in the nation's economic growth

process, the government has put in place various policies and incentivestoattractFDI

to Nigeria. For example, to augment the domesticshortfall of capital resources forthe realisation of sustainable' level of growth and development, the government

expressed her readiness in the 1997 budget, to enter into investment protection,

agreements with foreign governments or private organisations wishing to invest in

Nigeria, as well as discuss additional incentiveswithprospective investors. In this

connection, the government inaugurated, the Nigerian Investment Promotion

Commission (NIPC), which replaced the Industrial Development CoordinationCommittee (IDCC), as a one-stop agency that would facilitate the inflow of FDI.

The IDCC was established in 1988 for the purpose of fostering a conducive

regulatory environment and serve as the first port of call to a potential investor. The

Nigerian Investment Promotion Decree No. 16 of 1995 reflected the new enhanced

liberal foreign investment policy of the government. There were also tax related

incentive measures such as pioneer status, tax relief for Research and Development

which provides for a graduated amount of tax allowance to be deducted from profit;

company incometaxwhich has been amended to encourage potential and existing

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Salako/ Rdebusuyi 23investors; tax free dividends as well as tax relief for investments in economically

disadvantagedlokal government area.The Debt Conversion Programme (DCP) was also introduced ks a major

vehicle for the inflow of foreign investment. The privatisation and commercialisation

programme in which government disengagefiomactivities that could be effectively

undertaken by private economic,agents was among others meant to encourage the

inflow of foreign investments. Similarly, the establishment of the Export Processing

Zone at Calabar was aimed at attracting more foreign investments through provision

ofinfiastructural facilities and elimination of bureacratic bottlenecks. While, therepeal of the Nigerian Enterprises Promotion Decree (NEPD) of 1972, and the

Exchange Control Act of1962,were aimed at making the investment climate more

conducive for foreign investors.

However, these measures are observed not to have yielded the desired results

in terms of attracting FDI inflows. For instance, aggregateFDI inflow into Nigeria

through existingforeigdjointly owned companies during the1970saveraged562.3million yearly in nominal terms. As a proportion of the gross domestic product (GDP),

it accounted for 3.6per cent during the period. Before the introduction ofthe

Structural Adjustment Programmes (SAP) in1986,total foreign investment inflow

for 1980saveraged8,178.2million annually and represented4.3per cent of GDP.

During the period 1987 - 1990,average foreign investment inflow rose to 8,183.6million, representing3.0per cent of GDP, while the average inflow was 15,402.5

million or 1.4per centofGDP during1991 - 1998.

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24 CBN ECONOMIC&FINANCIAL REVIEW, VOL.39 NO. 1Specifically, Nigeria has not benefited significantly from this vital resource

during the lasttwodecades in spite of its high potential for the attraction of foreign

investments because some aspects in her investment policies have not been generally

investor-fiiendly.

SECTI ON 111THEORETICAL FRAMEWORK ANDLI TERATURE

REVIEWTheoretically, foreign direct investment is expected to be influenced by the

size of the market for the products of such investments. Foreign direct investment is

also expected to increase where there exists higher profit ratesso as to follow the

direction of marginal productivity of capital. Availability of relevant raw materials is

alsoexpected to catalyse the inflow of foreign direct investment, while the existenceofprotectionist policies is also expected to attract foreign investments for locally

produced goods. Other factors which are likely to influence the direction and

magnitude of FDI include domestic investment, low labour and production costs;

political stability and enduring investment climate; international product differentials

as weil as cordial supplier relationships. Additionally, favourable regulatoryenvironment as well as functional infrastructural facilities are expected to be

pull-factors for FDI inflow. These above mentioned factors or determinants ofFDI

have been succinctly documented in numerous research works. Ingeneral, the results

ofmost of these previous studies show that the principal determinants of FDI are

related to the economic and political nature of the host country s economies.

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Salako/Adebumyi 25For the developing economies, Pfeffermann and Madarassy (1992)

identified the major determinants of foreign direct investment to include; the size of

the domestic market, inflation, exchange rate volatility, interest rate and

macroeconomic policies. They found that the size of the domestic market and

capacity utilizationarepositively related to direct foreign investment, while inflation

and volatile exchange rates have negative effects on foreign investment. High and.

rising inflation rates heightens fears of rising costs of imported capital goods and

inputs, while an unstable exchange rate also creates foreign exchange risk and

uncertain investment climate.

Several researchers have variously explored the importance of the sizeof

domestic market on the inflow of FDI. They used tested proxiesofmarket demand

levels and marketgrowthrates of host economies toseeif there was a significant

correlation between these proxies. For example, Dunning(1973) indicated that the

dominant influences on FDI are thegrowthand size of the host country' smarket

while Root and Ahmed(1978) as well as Schneider and Frey (1973),also found astatistical relationship betweenFDI and market demandas measured by per capita

GDP(GNP)of some developing countries. Inaddition to Pfeffermann and Madarassy

(1962), the statistically significant relationship between inflation rates and ForeignDirect Investment (FDI) have further been established by Dornbusch and Reynoso

(1989)who stated that it affected private investment rates in developing countrieswhere inflation is less often correlated with rise in economic output than in industrial

countries.Thisis because high rates of inflation adversely affect private investment

by increasing the risk of longer term investment projects, reducing the average

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26CBN ECONOMIC&FINANCIAL REVIEW, VOL.39NO. 1maturity of commercial lending (credit), and distortingtheinformation content of

relative prices. Obadan (1994), also noted that high inflation rate reducesinternational competitiveness of exports, foreign exchange earnings and puts

pressureoncurrent account and exchange rates. Inshort,highinflation rates may be

consideredas indicator of macroeconomic instability and a country' s inability tocontrol macroeconomic policy, bothofwhich contribute to an adverse investment

climate.

The influence of political stability or conversely political risk on FDI flows

have also been tested. Early studies of foreign investment decision process indicated

that political instability was oneofthe main factors investors cited in explaining

decision for not investing in a particular country. For instance, Basand Aharoni

(1963) concluded from their .research works that next to market size and growth,

political instability was the most dominant influence in investment flows. Root and

Ahmed (1978) also found that political stability was a significant variable in direct

investment flows. The importanceof government investment, the change in bank

credit and capital inflow to the private sector in determining private investment was

confirmed by Wai and Wong(1982).

Osuagwu (1982) found that the determinants of investment demand in

Nigeria from 1960-1975 were the expected rate of returns, the supplyoffunds;

absorptive capacity and government policies. Obadan (1982) also confirmed the

importance of market size, trade policies and raw materialsas important determinants

of foreign direct investment in Nigeria. Thiswas further corroborated by Anyanwu' s(1998) study which additionally highlighted the significanceofdomestic investment,

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SaIakdAdebusuyi 27openness of the economy and indigenisation policy. Also, the rising bank lending

rate profile in Nigeria during the 1987-90 period was noted by Ajakaiye (1995) to

have discouraged productive investments.Thisis because lower lendingrateinthehost economy is expected to have an overall effectofhigher internalrateofreturn

(IRR)on investment, and boost investment inflow. Mckinnon andShaw(1973),onthe other hand hypothesised that private investors inLDCsmust accumulate money

balances before undertaking investment projects because of limitedaccess to credit

and equity markets in theLDCs. But Aremu(1997) observed thatthehostcountryof

FDI make credit available to investors in the form of subsidized loans, loan

guarantees as well as guaranteed export credits. These creditsareprovided directlytoforeign investors for their operations particularly atdefiayingsome inevitablecostswhich invariably have an immediate impact on cash flow and liquidity.

The importance of exchange rate on inflow of foreign private investmenthas

been traced by Obadan(1994),who noted that its importanceas the centre piece ofthe investment environment derivesfkomthe argument that a sustained exchange ratemisalignment in terms of overvaluation or undervaluation, is a major source of

macro-economic disequilibria which spells danger for investment. Consequently,an

over valued exchange rate will discourage export and negatively affect the foreign

private investment environment.

The presenceoflarge external debt burden according to Borensztein(1989)

and Froot and Krugman (1990) also plays a vital role in reducing investment

activities. This is because the higher debt service payments associated with a large

external debt reduce the funds available for investment. Secondly, the existence of a

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28 CBN ECONOMIC&FINANCIAL REVIEW, VOL.39 NO. 1large debt overhang in the form of high ratio of external debt to GDP, can reducethe

incentives for investment, because much of the returns from investments must be

used to repay existing debt. Thirdly, if substantial, external debt leads to difficulties

in meeting debt-service obligation, which may strain relations with external creditors

and make it harder or more costly to finance or attract private investment. The work

of Essien and Onwioduokit (1999) finally confirmed that there is a long run

equilibrium relationship between FDI flow to Nigeria and variables suchas credit

rating, debt service, interest rate differential, nominal effective exchange rate and real

income.

The present study, apart from adopting the existing ones, incorporates

government capital expenditure to capture infrastructural development and a proxy

for political stability. It covers a period (1970- 1998) which is considered to be largeenough to test for stationarity and cointegration of the variables.

SECTION IV

MODEL SPECIFICATION AND ESTIMATION PROCEDURE

Contrary to the open policies adopted towards foreign investments in East

Asian industrializing countries since the sixties, Nigeria, in the seventies and

eighties, introduced a regulatory framework and institutional arrangements which

had the unintended effect of retarding the inflow of foreign investments. In addition,

there were other factors suchas the debilitating external debt burden as well as some

social, economic and political developments which militated against the inflow of

foreign direct investments. These issues therefore become very crucial inspeciQingthe determinants of FDI flows to Nigeria.

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Salako/Adebusuyi 29Generally, various approaches have been used in the literature in the

modeling and estimation of investment functions depending on the objective at hand.

These approaches are variants of the approach used by Tun and Wong(1 988)and is

adapted for this study. The model with expected signs is specifiedas follows:

FDI = f(DPCI, HGI. DIR, DEXR. DIF. DCPS. EDR. POLS) ........(+I (+ (+) (+1 (-) (+) (3 (+where:

FDI = Inflow of Foreign Direct InvestmentFPCI = Domestic per Capital Income

HGI - Host Government Investment

DIR - Domestic Interest Rate

DEXR = Domestic Exchange Rate

DIF - DomesticInflationRateDCPS - Domestic Credit to Private SectorEDR - External Debt Ratio

-

-

--

POLS = Domestic Political Climate (Dummy Variable)

The estimation period is from1970-1998.The data used in this study are

from the Statistical BulletinoftheCBN (1998),CBN Annual Report(1998)and theInternational Financial Statistics Year Book ofthe IMF (1996). The ordinary least

squares technique(OLS) estimation method was applied using computer software,

microfit286. I "

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30 CBN .ECONOMIC&FINANCIAL REVI EW, VOL. 39 NO. 1Iv.1 StationarityandCointegration

For aguide to an appropriate specification of the regression equation, the

characteristicsofthe time series data used for estimation of the model were examined

to avoid spurious regression which results from the regrebsion of two or morenon-stationary series. Statistical properties of any regression analysis using

non-stationary time series has been consideredas being spurious (Philips, 1987)

The presence of cointegration means that long-run equilibrium relationship

exists among the non-stationary variables. Granger and Newbold,(1977)and Granger

and Engle, (1985) have all shown that the existence of cointegration is a sufficient

condition for the formulation of a model that allows for the incorporation of an error

correction term (ECT). Theinclusion of theECT in a model ensures that the long-run

relationship is preserved.

To test for stationarity and cointegration, the study adopted the Augmented

Dickey-fuller (ADF) test, and the Sargan-Bhargavan Durbin-Watson (SBDW) test.

SECTION V

INTERPRETATION OF RESULTS

The resultsofthe stationarity tests are presented intable1anditshows that all

data points used were stationary.

The result from the regression of the inflow of FDI against the regressors, is

as shown inTable2.The result shows that exchange rate, government domestic

investment, credit to private sector, external debt and political stability conformed

with the a priori expectation while inflation rate, domestic interest rate, and

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SalakoandAdebusuyi 31

per capital income failed to conform to a priori expectation. The DW - statisticof

1.88 indicates the absenceofserial correlation between FDI and the independent

variables.

The exchange rate is directly correlated with FDI inflow in line with a priori

expectation of a depreciating exchange rate. It was statistically significant,

The positive government capital investment shows the importance of the

existence of basic infrastructure to attracting foreign investment inflow. Availability

of sound and functional infiastructural facilities entice foreign-investors into aneconomy.

The External Debt ratio (DebVGDP) reflects the apriori expectation that adebt ridden country will not be able to attract foreign investors; i.e. the higher theDebt-GDP ratio the lower the foreign investment in the country. The result showed

that when the external debt ratio risesbyoneper cent, the inflow of FDI will reduceby about15per cent.

Credit to the private sector is positive because since a foreign investor will be

operating in the domestic environment and therefore benefit from such credits. This

implies therefore that a favourable credit environment would result in higher inflow

ofFDI.

The period of relative stable political situation in the countryas compared

with coup years hasapositive effect on the inflow of FDI. That is, the more stable

the political climate in a country, the more inflow of FDI it might attractas thiswould

create confidence in the business community. However, the relationship issatisticallyinsignificant

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32 CBN ECONOMIC&FINANCIAL REVIEW, VOL.39 NO. IInflationfailedtoconform to apriori expectation though the result shows a

sbtisticailysignificant relationshipwithFDI flows.The Real Per Capita Income is negativeas against the positive apriori

expectation, though statistically significant.Thismay be due to the fact that thePC1in the country is not being properly calculated especially with the contentious

populationfigureused in the computation. Also,the fact remains that there are lots

of income from several informalactivities which enhance the purchasing power of

the populace but which are not captured in the GDP used in computing 'Per

Capita Income.

The coefficientofinterest ratewas alsoexpected to be positive because a

high interestisexpected to induce savings and hence make more fund available forinvestment in the country. But from the result, it is negative probably due to the factthat the interest rate (especially the CBN discount rate) is tied to the lending rate and

thi s means that a high interest rate will lead to a fall in investment and vice-versa.

TheGDP for the Industrial Countries (XGDP) who are potential investors was

expected tobenegativeas shown in the resultofthe regression. The decline in per

capita income in the industrial countriesisexpected to induce investors to look forbetter investment avenues in other countriesas this is indicativeofdepression in

economicactivitiesin these countries.

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Salako/Adebusuyi 33I? RECOMMENDATIONS AND CONCLUSIONSA. Recommendations

From the results of the empirical study carried out, the following

recommendations are proposed to encourage and improve the inflow of foreign

private investment. There is need to put in place appropriate policies and strategies

that will ensure the maintenance of stable foreign exchange rate as this has been

shown to be a very important factor influencing the inflow ofFDI. Government

should improve its investment especially on basic infrastructure such as road, energy,

water supply, telecommunications, security etc. The provision of adequate

functional basic infrastructure will go a long way in reducing the cost of operating

business in Nigeria and encourage foreign investment inflow.

The issue of the countrys debt problem should also be adequately addressed

as it affects the countrys credit worthinessand discourages foreign investments.Further efforts should therefore be geared towards reducing the debt burden in such a

manner that it would boost the credit image of the country while not impairing the

provision of financial resources for the improvement of infiastructural facilities.

B. Conclusions

The major factors which influence foreign direct investment inflow into

Nigeria for the period1970-1998were examined. The preliminary empirical resultsshow that exchange rate, government capital investment, domestic credit to the

economy, rate ofinflation and real per capita income are significant factors

influencing foreign direct investment in Nigeria. However, domestic interest rate

and per capita income are not properly signed though statistically significant, on the

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34 CBN ECONOMIC&FINANCIAL REVIEW, VOL. 39 NO. 1other hand,. inflation rate was statistically insignificant though not properly

signed. Furthermore, available data used in computing per capita income

probably led to its non-conformity with a priori expectation. The politicalstability variable was included to capture uncertainty in the economic

environment. Though not statistically significant, it has positive impact on

foreign investment.

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Salako/Adebusuyi 35TABLE 1

TESTING THE ORDER OF INTEGRATION OR UNIT ROOT TEST

VARIABLES

RFPI

DIREDRXGDPRPCRRGDIVREXRINFRRPCI

VARIABLES

DRFPIDDIRDEDRDXGDPDRPCRDRGDIVDREXRDINFR

DWFRDRPCI

DF/1-3.284(-3.5943)-3.134 "-1.7979 "-3.7455 "-1.258 "-2.2523 ''-2.0731 "-3.7331 "-2.143 "

ADF/2-t statistics with constant-2.4262 '' --I(1)

-4.2744 " --J(0)

-2.53231(-3.60I --I(1)-2.4706 " --I(1)

-1.9515 --I(1)-2.3348 " --I(1)

Lb

-2.1812 " --I(1)

-2.5074 " --I(1)-4.6883 66 --I(0)

First Differences

DF/1 ADFd- t statistics with constants-7.0886(-3.6027) -4.6596 (-3.6119)-6.6797 " -5.1227 "-42245 " -3.0114 "-5.3718 " -5.2091 "-3.8157 " -4.9413 "-6.1862 " -3.3833 "-4.2262 " -4.0580 "-4.6696 " -4.8240 "-4.5907

"-5.2747

"-4.8586 " -3.2094 "

Note:1Dickey -Fuller$teststatistics2/AugmentedDickey -Fuller test statistics

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36 CBN ECONOMIC&FINANCIAL REVIEW, VOL.39 NO. 1TABLE 2

ORDINARY LEAST SQUARES ESTIMATION

Dependent Variables isDRFDI27 Observation used for sentimation from 1970 to 1998

Regressor Coefficient Standard Error T-Ratio(prob.)E -2.388 2.085 1.1453(270)DREXR -3.279 1 1.0175 3.227(0.006)*DDRGDIV -0.10985DDEDR -0.15191DDCPS 0.2694DINFR 0.253 19DDIR -0.1 1753

POLS 3.3152DRPCI -2.4782DXGDP -2.6426

R- Square 0.81342R- Bar - Square 0.70148ResidualsumofSqure 776.0744S.D.ofDependent 1.3 164DW- Satistics 1.8854

0.0336640.0912360.0942760.103260.4936

3.68660.910651.0451

3.2633(0.005)*2.8575(0.012)*2.45119(0.027)*.23830(0.815)0.89927(0.383)

-1.6651(.117)

-2.7214(0.016)*-1.5717(0.137)

F- satistics;F(9,17) 7.2662(.000)S.EofRegression 7.1929

MeanofDependent variable 0.199 13Maximumoflog likelihood-78.4156

*Significant t- ratio at 5% level

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